Q1 FY2014 net profit of S$69 million (up 5 per cent q-o-q, down 2 per cent y-o-y) came in largely within expectations, and made up more than 24 per cent of our full-year FY2014 earnings estimates. Revenue of S$289.4 million showed similar flattish trends - lower 4 per cent y-o-y on lower material and fleet management revenue - but core operating margins dipped during the quarter to 9.6 per cent, down from 10.9 per cent in Q4 2013 and 11.4 per cent in Q1 2013, likely on the back of higher subcontract costs.
The performance of the group's JV/associates - largely driven by its engine shops like SAESL and Eagle Asia - picked up strongly in Q1 2014, likely helped by a stronger US dollar. Contributions from JV/associates improved 14 per cent y-o-y to S$45.6 million, accounting for close to 58 per cent of group profit before tax during the quarter.
Near-term outlook is steady but unexciting. We expect sustained demand for the group's core MRO (maintenance, repair and operations) businesses in the near term, despite the uncertain macro environment. SIE should continue to benefit from growth in air traffic in the Asia-Pacific region, supporting the relative resilience of Asian carriers. Growth will be driven by its cluster of strategic partnerships that SIE has established in various pockets of the MRO value chain over recent years, but the ramp-up will be gradual, as evidenced by the flattish growth in FY2013.
Trading is at close to +2 standard deviation valuations. Cash generation continued to be robust in Q1 2014 and net cash is now close to S$620 million, supporting the group's ability to pay steady dividends. However, further growth in dividends is unlikely in FY2014 and current valuations look rich at 20 times FY2014 PE. Given the lack of significant near-term catalysts, we maintain "hold" at a revised target price of S$5.10.
HOLD
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